ULI Sees Pace of CRE Dealmaking, Prices to Moderate Through 2018

After six consecutive years of growth, commercial real estate transaction activity is expected to moderate next year, with lower but still relatively high transaction volumes, but better-than-average operating fundamentals in most property types resulting in continued but slower growth in property prices and rental rates, according to the latest three-year survey of analyst sentiment released by the Urban Land Institute (ULI).

The semi-annual ULI Real Estate Consensus Forecast, based on a survey of 51 leading real estate economists and analysts, including CoStar Portfolio Strategy Managing Director Hans Nordby and Managing Consultant Shaw Lupton, was less bullish compared with the previous survey six months ago. Sentiment in the survey taken during September and October points to ongoing but slower expansion of the U.S. economy over the next three years.

CRE investment sales volume, which peaked in 2015, is expected to decline gradually over the next three years, yet even at the diminished levels, expected annual deal making volume in 2016 and 2017 will be eclipsed only by volumes for 2007 and 2015.

Survey respondents also tempered their expectations from the spring survey about interest rates, housing starts and private real estate returns. Commercial mortgage-backed securities (CMBS) issuance, a key financing source which had grown since 2009 and peaked at $101 billion in 2015, is expected to decline sharply in 2016 to $70 billion before resuming growth over the next two years, reaching $90 billion in 2018.

The 51 analysts were also less optimistic about single-family housing starts, which are projected to increase from 714,500 units in 2015 to 875,000 units in 2018, remaining below their 20-year historical average.

Industrial and warehouse was the only sector among the six major property types to log an increase in optimism from six months ago, with respondents expecting peaking occupancy but continuing warehouse rental rate growth through 2018.

The sentiments among a panel of CRE executives and analysts discussing the survey results in a webinar presentation Wednesday afternoon ranged from general agreement, voiced by Jim Clayton, head of investment strategy and analytics for Barings Real Estate Advisors, to somewhat less optimistic, as articulated by Josh Scoville, senior managing partner of investment management for Hines.

“I think the outlook looks a little bit too sanguine for my taste and frankly, it looks a lot like the 2006 and 2007 outlooks,” Scoville said. “There are a number of imbalances ranging from declines in corporate profits and manufacturing indices to certain sub-sectors of the employment market that the economy could overcome, but I think will cause a little bit more of a slowdown then what the consensus expects.”

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